Mac Financial Services Inc.

Leasing Terminology Glossary

Acceptance: ("Delivery & Acceptance"): The lessee’s acknowledgement (in writing and verbally) that the equipment to be leased is in satisfactory condition and has been received in it’s entirety. MAC Financial and or it’s affiliates will not release payment to the vendor(s) until the acceptance has been confirmed.

Advance Payment(s): The payment(s) paid in advance which are reduced from the total number of payments on the lease term. Generally the first and last payment(s) are collected up front making the next scheduled lease payment due thirty days later.

Application: Required form requesting all pertinent information to apply for credit. The information supplied is to be used solely for the purpose of obtaining credit and is strictly confidential.

Application Only: One page credit application which requires the legal name, owner(s), bank and borrowing references. This minimal amount of information is required for credit requests up to $300,000 (other leasing companies only go up to $75,000). This program does not require any financial statements, tax returns (corporate or personal), personal financial statements, or business plans.

Bargain Purchase Option: Gives the Lessee the option to purchase the equipment at a price below the fair market value upon lease termination.

Blanket Lien: All assets currently or future owned by the debtor are pledged in addition to the current equipment purchase. This is standard in the banking industry. The language must be stated on the UCC filing (please be sure to read that document carefully). MAC Financial does not file blanket liens. Only a lien on the acquired equipment is filed.

Capital Lease: This is a lease with a pre-stated bargain purchase option. Most popular are the $1 Buy out, $101 buy out, PUT (payment upon termination) & 10% purchase option. Exercising this option upon termination of the original leases term will transfers ownership and generally does not qualify under IRS guideline FASB 13 as an operating or tax lease. This equipment is treated as an asset and liability on your balance sheet. However, some significant other tax benefits under IRS section 179 may be available to your business. Calendar year 2004 allows for up to $100,000 in a one time write off for capital lease purchases (please see MAC Financial's tax advantages for more info) Always consult your accountant for your particular tax situation.

Deferred Payment: The first payment is deferred 60, 90 or 120 days to accommodate training, deferred contract payments and/or to preserve cash flow.

Demand Clause: The ability for a lender to accelerate the lease or loan in its entirety upon demand for various reasons which can include financial requirements of sufficient cash flow and debt to worth ratios. This is standard in the banking industry. MAC Financial does not support that type of business practice.

End of Lease Options: Upon the original leases termination, the lessee has the option to purchase the equipment. Typical options are the $1 Buyout, $101 Buyout, FMV (fair market value), 10% and PUT (payment upon termination). However, certain leases include the option to continue leasing the equipment or return the equipment to the Lessor. Individual option definitions are provided elsewhere in this section.

Fair Market Value (FMV): This is the future value of the equipment at lease termination. The Lessee will have the option to negotiate it’s then fair market value and purchase the equipment. Otherwise, the Lessee can either return the equipment with no further obligation or continue to lease the equipment for an additional twelve months at the original leases payment. The FMV Leases may also qualify as a tax deductible operating expense (please consult your accountant for your particular tax situation).

FASB: Federal Accounting Standards Board

FASB 13: The criteria used to determine the lease classification as stated by the Federal Accounting Standards Board in the statement 13. In order for the Lessee to “expense the monthly payments”, the following criteria must be met:

1. The lease does not automatically transfer ownership of the equipment upon lease termination.
2. The lease does not provide a minimal or bargain purchase option at lease termination.
3. The term of the lease is less than 75% of the economical life.
4. The present value of the lease payments are equal or greater than 90% of the fair market value of the equipment.

This classification will determine the difference between an operating tax lease and a capital lease.

Fixed Payment Floating Rate: This is a loan with a fixed payment throughout the term. The original payment is based on an agreed upon percent over prime. The final payment is based on the average adjustment of prime during the term which has a clean up every 360 days. This loan allows for early pay out.

Hard Assets: Certain equipment such as construction, printing, machine tool and transportation are considered hard assets and allow for much higher residuals which will provide a much lower monthly investment.

Insurance: Insurance must be provided prior to payment to the vendor and must be maintained during the entire lease term. The lessor is primarily listed as the loss payee and additional insured. Insurance is the sole responsibility of the lessee. However, MAC Financial offers all risk/liability and casualty for certain equipment.

Lease Agreement: A non-cancelable agreement entered by a lessee and lessor to acquire equipment.

Lessee: The legal entity that is leasing the equipment and responsible for the lease. This can be an individual (Sole Proprietor) Corporation, LLC, or Partnership.

Lessor: The legal entity that owns the equipment to whom lease payments are made. The lessor makes no warranty or guarantee on the equipment.

Master Lease: The most convenient way for customers to purchase several pieces of equipment with different delivery dates or from more than one vendor. It provides the flexibility to pay a vendor for their equipment upon delivery and acceptance without having to wait for other vendor(s). Since rates are often based on the amount borrowed, this will also allow for a lower rate. There is one credit approval with one master lease agreement. Each take down will have a separate schedule and you only make payments on the equipment that is delivered.

Off-Balance Sheet Financing: Financing that does not add debt to a company's balance sheet under liabilities. Under a true lease, the lessee does not show the leased equipment as an asset (the lessee doesn’t own the equipment, nor does the lease structure imply transfer of ownership), nor is the lessee required to report the liability.

Operating Lease: A lease that is not classified as a capital or finance lease based on the ability to meet the FASB 13 guidelines. This lease is treated as off-balance sheet financing.

Progress Payments: Many purchases require up to 100% of the sale price prior to delivery. This is necessary since most leases require delivery and acceptance prior to payment. In addition, this will meet the specific needs of the vendor without actually delivering the equipment. In some cases, the equipment is custom built, or being shipped over seas. Whatever the case may be, MAC Financial is able to meet the vendor(s) terms by making progress payments in multiple stages until the equipment is paid in its entirety. This will preserve both you and the vendor(s) cash flow and make the purchase possible.

Purchase Option: This is the option to purchase the equipment upon lease termination as previously stated.

PUT Option: This is a guaranteed Payment Upon Termination. There is no other option but to purchase the equipment for the previously stated amount and ownership transfers to the lessee.

Rate Factor: A four to five digit decimal number used to calculate the monthly payment. The rate factor multiplied by the equipment cost will compute the monthly payment. The rate factor is determined on term, credit, equipment and purchase option/residual value.

Recourse: A vendor(s) financial obligation in the event of a default from the lessee. This is generally an ultimate net loss. However, in certain cases, there can be up to 100% monetary guarantee. In other cases, it can stipulate a time frame in addition to a monetary obligation. Lastly, re-marketing agreements are required from time to time if it is a specialty piece of equipment with an exclusive niche. These obligations are only enforced in the event of a default by their customer(s), the lessee. Please note that MAC Financial does not require recourse with its vendors.

Residual Value: The value of the equipment at the end of the lease term.

Sale Lease Back: The ability to re-capture previously invested capital used to purchase equipment. MAC Financial will purchase the equipment and reimburse the previously invested capital to the lessee by entering into a 12 to 84 month lease

Seasonally Lease Payments: Lease payments that are adjusted to accommodate cash flow needs based on their particular situation. Payments are reduced or eliminated during the slower or off-season months. However, this will increase the other months proportionally compared to a standard lease with even payments throughout.

Security Deposit: The amount paid at the beginning of the lease held by the lessor. This amount is a refundable contingent on all lease payments paid satisfactory along with any other amounts due under the lease terms. It certain cases, the security deposit may be applied to the purchase option.

Skip Payment Leases: The lessee selects a series of months in which reduced or no payments are due. Due to inclement weather, many customers anticipate reduced revenue during certain times of the year.

Step Payment Lease: Lease payments are stepped up or down to accommodate the lessee's anticipated cash flow needs. Depending on the equipment, industry and territory, customers need the flexibility to make uneven payments during the lease term. One of the most common is to have reduced initial payments to allow the company to generate revenue while completing a training period or awaiting revenue from their customer(s).

TRAC Lease: An open End Commercial Lease with a Terminal Rental Adjustment Clause. TRAC Leases are limited to motor vehicle and trailers leased to businesses that use a minimum of 50% of the time for business purposes. TRAC leases have none of the penalties associated with other leases and up to 100% of the monthly payment can be tax deductible. At the beginning of the leases a residual is determined and will be used to determine the monthly payment. Upon lease termination you can purchase the equipment for the preset residual, return the equipment, or trade it in for a new purchase. Whether you trade it in or return it, you will receive any proceeds for the sale or pay the difference to satisfy the preset residual.

True Lease: (Tax or Operating Lease). A true lease, by definition, does not call for the full payout of the equipment cost during the lease term, nor does a true lease imply a transfer of ownership following the lease termination. The lessee is only paying for the equipment during a portion of that equipment's useful life. The lease payments are often treated as 100% tax deductible operating expenses. The lease generally does not appear on the balance sheet as a business asset or as a business liability. This type of lease also offers lower payments for lease term. A true lease may (but does not have to) include an FMV (fair market value) option which allows the lessee to purchase (take full ownership of) the equipment for its then fair market value at the lease termination.

UCC: Uniform Commercial Code. This is the state required filing form to properly place a lien against the leased equipment.

UNL Agreement: Ultimate Net Loss. The difference between the amount owed from the lessee and the proceeds in the event of a default.

Vendor: The manufacturer or distributor selling the equipment.

Working Capital: Current assets less current liabilities. Leasing conserves working capital by allowing a business to acquire their needed equipment with little or no money down. In addition this will allow the equipment to generate revenue and pay for itself over the term.